What Will Trump’s Approach Be To Saudi Arabia And OPEC+?

One of President-elect Donald Trump’s key achievements when first in office was keeping the benchmark oil prices within a very carefully managed range – ‘The Trump Oil Price Range’.

The lower part of this is US$40-45 per barrel of the Brent benchmark, which is the price at which the bulk of U.S. shale oil producers can breakeven and make a good profit on top. The upper part is US$75-80 per barrel, which ties into historical data showing that a gasoline price of under US$2 per gallon has been most advantageous for U.S. economic growth. This US$2 per gallon level has historically equated to a West Texas Intermediate (WTI) oil price of around US$70 per barrel. And as WTI has also historically traded at a discount of between US$5-10 per barrel to the Brent oil benchmark, this US$70 per barrel of WTI price equates to around US$75-80 per barrel of Brent. Judging from Trump’s comments on the campaign trail and in his ‘Agenda47’ blueprint for a second term, his view that oil prices should continue to be heavily influenced by the U.S. in such a way has not changed. And given these factors, his handling of the OPEC members of the OPEC+ oil cartel, and their de facto leader Saudi Arabia, will be much the same as it was in his first term in the top job.

There are two vital reasons, to begin with, why the Trump Oil Price Range so rigorously enforced in his first presidency is so critical to the interests of Trump personally, his Republican Party, and the U.S. more broadly, as fully analysed in my latest book on the new global oil market order. One reason is economic and the other political, although as ever the two elements are closely related. The economic rationale revolves around the close correlation between oil prices and the wider health of the U.S. economy. Historical data highlights that every US$10 per barrel (pb) or so change in the price of crude oil results in around a 25-30 cent change in the price of a gallon of gasoline, and for every 1 cent that the average price per gallon of gasoline rises, more than US$1 billion or so per year in consumer spending is lost. The second – political reason — is that since 1896, the sitting U.S. president has won re-election 11 times out of 11 if the economy was not in recession within two years of an upcoming election. However, sitting U.S. presidents who went into a re-election campaign with the economy in recession won only one time out of seven. The same pattern broadly applies to the re-election chances of candidates of any sitting president’s party in U.S. mid-term elections as well, the outcome of which affects the ability of the incumbent leader to push ahead with their legislative agenda for the last two years of their presidency. In any event, the statistics make sober reading for incumbent U.S. presidents and the senatorial, congressional and gubernatorial candidates of their party when considering how to handle domestic and international policies related to the oil price. Consequently, it is not surprising — as Bob McNally, the former energy adviser to former President George W. Bush put it – that, “Few things terrify an American president more than a spike in fuel [gasoline] prices.”

Trump’s preferred method of dealing with any attempts to disrupt this closely-managed and crucial oil price range was demonstrated early in his first presidency. Saudi Arabia and its OPEC brothers had just fought and lost the 2014-2016 Oil Price War aimed at destroying or at least severely disabling for years the then-nascent U.S. shale oil sector, as also as fully detailed in my latest book on the new global oil market order. This had left the Kingdom and its OPEC followers in devastated financial positions, which could only begin to be resuscitated by orchestrating OPEC-led rises in oil prices, which is what the cartel began to do, with the help of its new-found ally, Russia (which by that time had become the ‘+’ in ‘OPEC+’). These efforts pushed oil prices up over the key US$80 per barrel Brent ceiling of the Trump Oil Price Range in the second half of 2018, whereupon Trump warned Riyadh to stop doing this in a speech before the United Nations General Assembly, saying “OPEC and OPEC nations are, as usual, ripping off the rest of the world, and I don’t like it. Nobody should like it.” He added: “We defend many of these nations for nothing, and then they take advantage of us by giving us high oil prices. Not good. We want them to stop raising prices. We want them to start lowering prices and they must contribute substantially to military protection from now on.” Following Trump’s direct and clear warnings to Saudi Arabia’s Royal Family in the third quarter of 2018 of the catastrophic consequences if the Kingdom continued to keep oil prices higher than the US$80 per barrel Brent price ceiling, Saudi Arabia increased production and oil prices came down again. That period was the only part of Trump’s presidency that saw his Oil Price Trading Range breached to the upside.

Over this period, oil prices stayed well below the US$84 pb or so level that the Saudis needed to breakeven on their national budget, never mind attempting to replace the hundreds of billions of dollars it had lost in fighting the 2014-2016 Oil Price War. Given this, it was little surprise to many that the Kingdom tried its luck again in the later part of the Trump presidency, with yet another Oil Price War in early 2020. It and its fellow OPEC members dramatically overproduced oil again, crashing oil prices and pushing WTI into negative pricing territory at one point, aiming as it did before to destroy the economic viability of as much of the U.S.’s shale oil sector as possible for as long as it could. Trump’s reaction to this was even more direct than before, with a telephone call made on 2 April (according to a very senior source in the White House spoken to by OilPrice.com at the time) in which he very clearly told Saudi Crown Prince Mohammed bin Salman that unless OPEC started cutting oil production – so allowing oil prices to rise (above the danger zone for U.S. shale oil producers) – that he would be powerless to stop lawmakers from passing legislation to withdraw U.S. troops from Saudi Arabia. It was also made very clear by Trump that the next time the Saudis tried the same thing it would be the end of the 1945 Agreement between the U.S. and Saudi Arabia that had laid the foundation for their cooperation since that point, as also analysed in full my latest book on the new global oil market order. This, said Trump, would involve the immediate withdrawal of all U.S. military assistance from the Kingdom, without further notice. Following that, Saudi Arabia and OPEC gradually cut oil production to bring prices back up.

Despite this, Trump ordered that the ‘No Oil Producing and Exporting Cartels’ (NOPEC) Bill be made fully ready to be passed into law at minimal notice, as a further deterrent to be used against Saudi Arabia. The NOPEC Bill would make it illegal to artificially cap oil production or to set prices, as OPEC does under the leadership of the Kingdom. The Bill would also immediately remove the sovereign immunity in U.S. courts for OPEC as a group and for every one of its individual member states. This would leave Saudi Arabia open to being sued under existing U.S. anti-trust legislation, with its total liability being its estimated US$1 trillion of investments in the U.S. alone. The U.S. would then be legally entitled to freeze all Saudi bank accounts in the U.S., seize its assets in the country, and halt all use of U.S. dollars by the Saudis anywhere in the world (oil is denominated in U.S. dollars, of course). It would also allow the U.S. to go after Saudi Aramco and its assets and funds, as it is still a majority state-owned production and trading vehicle. This would mean that Aramco could be ordered to break itself up into smaller, constituent companies that are not deemed to break competition rules in the oil, gas, and petrochemicals sectors or to influence the oil price.

Consequently, although oil prices are likely to trend to the downside under a Trump presidency given his pledge to “Drill, Baby, Drill”, any attempts by Saudi Arabia and OPEC+ to push them above the top of The Trump Oil Price Range are likely to be met with an extremely robust response from the Presidential Administration.